Barnes & Noble Said to Be Likely to End Search Without Buyer

Barnes & Noble Inc., the largest U.S. bookstore chain, is likely to end its months-long search for a buyer without a sale of the company, said five people with knowledge of the bidding process.

Private-equity firms and strategic bidders have backed away from the auction, said the people, who asked not to be identified because negotiations aren’t public. Interest from at least seven potential buyers waned after the first round of bidding, the people said.

The auction isn’t over and will probably last a few more weeks before the company officially calls off the search, one person said. Mary Ellen Keating, a spokeswoman for New York-based Barnes & Noble, said the process is still ongoing and declined to comment further.

The chain, facing increasing competition as more people buy electronic readers such as Inc.’s Kindle, hired Lazard Ltd. last year to explore a possible sale. Barnes & Noble makes the Nook e-reader, and some potential bidders balked at a purchase because of how long it may take the chain to generate more digital sales, two of the people said.

A few private-equity funds determined Barnes & Noble is relatively unproven in digital sales and would have to compete in that area with companies such as Apple Inc., and Google Inc., said the two people.

Digital Content

Barnes & Noble Chairman and founder Leonard Riggio has sought to improve results after three years of profit declines, hurt by consumers’ switch to digital content. The chain, which suspended its dividend in February and has sacrificed profit to invest in its e-reader, saw its closest rival, Borders Group Inc., file for bankruptcy this year.

Remaining public may put more pressure on Barnes & Noble shares as the company tries to transform itself, Michael Souers, an analyst for Standard & Poor’s in New York, said earlier this month.

“Investors don’t have the most patience in the world,” Souers said. He recommends holding Barnes & Noble shares.

Barnes & Noble fell 15 cents, or 1.6 percent, to $9.10 at 4:01 p.m. in New York Stock Exchange composite trading, giving the company a market capitalization of about $550 million. The shares have plunged 51 percent since Feb. 18, the last trading day before the company eliminated its $1 annual dividend.

Poison Pill

Riggio, the largest shareholder, and the rest of the board began examining a possible sale under pressure from Ron Burkle, who began building a stake in the company in late 2008.

The board responded to Burkle’s stock purchases by introducing a so-called poison pill in November 2009 to limit his ownership to 20 percent. Yucaipa Cos., Burkle’s Los Angeles-based investment fund, sued to overturn the pill and lost.

Yucaipa then waged a proxy contest last year to add Burkle and two other candidates to the board, losing to Riggio’s slate. Yucaipa held almost 19 percent of Barnes & Noble as of October, compared with about 30 percent for Riggio, according to data compiled by Bloomberg.

Riggio’s empire began in 1965 with a college bookstore in Manhattan’s Greenwich Village. In 1971, he bought the Barnes & Noble name and its flagship store in Manhattan. The company expanded through acquisitions, buying B. Dalton Bookseller and Doubleday Bookshops.

U.S. Expansion

The chain shifted from mall-based locations to superstores in the early 1990s. An initial public offering in 1993 provided the capital to expand across the U.S., and by 1996 the company had more than 400 of these locations. The company now has more than 700 superstores and has closed its mall sites.

Barnes & Noble added to its retail locations in August 2009 after buying Barnes & Noble College Booksellers Inc. from Riggio for more than $500 million.

More recently, the company’s investment in developing its Nook digital reader and creating an e-book library have fueled revenue gains. Sales at Barnes & Noble stores open at least a year rose 7.3 percent in the quarter ended Jan. 29, the first gain since 2007. Online revenue, where all digital content purchases are recorded, surged 52 percent to $319.4 million last quarter.

The spending has helped Barnes & Noble narrow the gap with market leader Amazon, which released its Kindle digital book reader in 2007, two years before the Nook’s debut.

E-Book Sales

The Kindle has 67 percent of the e-reader market in the U.S., followed by the Nook at 22 percent, according to a February report from Goldman Sachs Group Inc. Amazon also generates 58 percent of e-book sales, followed by Barnes & Noble’s 27 percent and Apple at 9 percent.

The retailer may also receive a boost from the bankruptcy filing of Ann Arbor, Michigan-based Borders, the second-largest U.S. book chain, in February. Borders plans to close at least 200 of its superstores as part of its restructuring. Barnes & Noble may take over some of those locations, Chief Executive Officer William Lynch said in February.